Valeant Pharmaceuticals Tactics Raises Fair Disclosure Questions

Valeant Pharmaceuticals International Inc. CEO Mike Pearson returned to the office last Monday after two months off sick.

Instead of calling investors (although that was planned and then called off – more on that below), Pearson decided to make individual calls to certain analysts. As a result of the calls, shares in the company rose more than 8%, according to Bloomberg. Some commentators are troubled by the course of action, and the perception of selective disclosure could be damaging, and some took to Twitter to express the concern.

@megtirrell lol ughm this guy should be in jail that’s not fair disclosure to investors $VRX

Controversial calls swing spotlight back onto Valeant Pharmaceuticals

Valeant claims that no financial details were divulged during the calls. However there is a chance that the calls could be against the spirit of the U.S. Securities and Exchange Commission’s Regulation Fair Disclosure, adopted in 2000. Regulation FD bans the selective disclosure of information that shareholders would like to know when making an investment decision.

The behavior is unlikely to lead to a formal investigation, but it could prompt the SEC to start some preliminary fact-finding.

“Like many public companies, Valeant engages in dialogue with investors and equity research analysts. In engaging in such dialogue, Valeant’s officers are cognizant of obligations under Regulation FD, and it is the company’s policy not to selectively disclose material non-public information,” the company said in a statement. The calls followed policy and a senior investor relations officer was involved in the calls, it said.

Valeant Pharmaceuticals – Information may not have been financial

Valeant shares have been fluctuating wildly due to questions over the company’s business model. Share prices took a huge hit after the company suspended a 4th quarter earnings call and withdrew financial forecasts, before acknowledging that it was under an SEC investigation.

Pearson then returned to the office last Monday and put in calls to certain analysts. In the immediate aftermath, shares in the company rose significantly. According to S.P.Kothari, an accounting professor at MIT Sloan School of Management and a former head of equity research at Barclays Global Investors, the analysts could have been afforded access to information that wasn’t necessarily linked to the company finances. They would have had a chance to gauge the voice, tone and attitude of Pearson, who had spent 2 months out of the public eye.

The company was subject to great scrutiny in Pearson’s absence, and the returning CEO is of vital importance to the future of the company. “These are issues that are not a storm in a teacup. This is a real storm, and whether or not the CEO is prepared to combat all these issues and navigate the ship through these turbulent waters is clearly of importance,” Kothari said. “To the extent that there is communication about the preparedness of the CEO, I think that would qualify, at least potentially, as material.”

Chart Via S&P Capital IQ

In a research note from March 4th, Jefferies states:

We spoke with Valeant CEO Michael Pearson about a number of key issues Thursday afternoon. Given his return this week and the maelstrom of scrutiny swirling around the co it was opportune. Our key findings are discussed below.

Somewhat Disjointed Return Impacted by Medical Leave Constraints: We asked Mr. Pearson to help clarify the timeline of his return and why there was a false start regarding the previously planned guidance call. Mr. Pearson indicated that he was technically on medical leave – which precluded him from interacting with the company – and he was only cleared to return by both his physicians and the Board on Friday, Feb 26. According to Mr. Pearson, given that there was only 48 hours for him to prepare he didn’t feel he had the chance to “get comfortable” with and “defend” the planned FY16 guidance. He thought that it would be “reasonable to take a few weeks” to reengage in VRX’s business operations before hosting an outlook call with the investment community. Of note, this future call is not contingent on the completion of the ad hoc committee investigation or 10K filing. Many believe that guidance will be lowered. Fx alone could impact revs by a couple hundred $M.

In a recent BTIG note, analysts opined that Valeant should:

Consider bringing a group of outside consultants to aid in the repair of the image of the Company. Management has a major credibility problem and it needs help restoring investor confidence
ASAP. Scheduling calls and cancelling them is a ‘no-no’ that only creates more uncertainty for investors.